Prudent Savings Bank was founded in 1839. Prudent is a profitable bank and has amassed over $300 million greenbacks in retained takings since its founding. Prudent is a mutual savings bank. Mutual savings banks are owned jointly by their depositors. Provident’s takings have been accumulating for many years but can't be accessed by the depositors. Provident Bank decided to convert to stock ownership and sell shares of stock in the bank to its depositors. The investors of the stock own all the equity or net worth of the bank including the kept takings which have been building up for a number of years.

Provident sold stock to its depositors at 65% of book value. Book value is worked out by subtracting the debt of the bank from the assets of the bank (including the retained earnings). Book price for many banks is mostly cash (retained revenues and the money received from the IPO). So that the depositors purchasing the Prudent stock in the IPO are largely purchasing the net worth of the bank for 65 cents on the greenback.

The IPO stock price was $10 per share. If the stock is coming out at 65% of book worth then the book value is about 15.38 per share (15.38 x .65 = 10.00). If the stock trades up to order price at 15.38 then there will be a 53.8% return for depositors who bought the stock at $10 (15.38 minus 10.00 cost = 5.38 gain divided by 10.00 cost = 53.8% return).

Prudent Bank converted from a mutual bank to stock possession and offered depositors of the bank to get shares in the conversion IPO at $10 per share. As a depositor at Provident Bank, I received notice by mail of the imminent conversion and a stock order form which permitted me to purchase shares in the conversion at the favorable IPO price of $10. I completed the stock order form and returned it to the bank along with a check to purchase the stock.

As a depositor at Prudent Bank, I was ready to purchase 52,000 shares of Provident Bank at $10 per share. I received a stock certificate from the bank (see copy of stock certificate that follows). I deposited the 52,000 shares of Prudent Bank in my brokerage account.

On the IPO date shares of Provident Bank started trading on the stock exchange. On the first day of trading, shares of Prudent Bank closed at 15.85. Purchasing the shares at $10 produced a $5.85 profit per share on the IPO date (current cost of $15.85 “purchase price of $10 = profit of $5.85). I had 52,000 shares of Provident Bank which produced a total open trade profit of $304,200 on the IPO date. Not bad for a day’s work!

Chuck Hughes Stock Advisory